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Futures Rebound, But Market Still Seen as Range-Bound

Lending more credibility to the theory that the current natural gas futures market is range-bound, the December contract on Tuesday gained 26.5 cents to close at $7.755. The rebound followed Monday's bearish action when the prompt month slipped 39.4 cents.

Some market experts saw Tuesday's rebound as a sign that traders were looking past the next few days of warmer-than-normal temperatures in favor of focusing on some colder forecasts for later in the month. "Some of the extended range forecasts we've been seeing out there are calling for another pulse of cold air coming back, so perhaps the market on Tuesday was looking at the more distant weather patterns and discounting the warmth we know we are going to have over the next two to three days," said a Washington, DC-based broker.

"Once again we were getting close to running out of momentum to the upside, but we quickly reversed that with Tuesday's push higher. Following the Japanese Candlestick charting method, Tuesday represented a classic bullish engulfing day, which means we made a lower low and had a higher high, so the bar Tuesday on the chart completely encompasses all of Monday's bar. It is a very bullish sign."

After trading between $7.430 and $7.630 on Monday, December natural gas on Tuesday traded a wider $7.310 to $7.940 zone.

The broker noted that looking at just the December contract, the market has not had more than a three-day sell-off in any one stretch. "By not getting anywhere near the $7.06 low for the move back on Oct. 31, I think it keeps us still in the bullish camp," the broker added. "We do seem to have this range between $7.06 and $8.50. I think we would have to get above $8.50 to really start pushing anything serious. I would still bet on the bullish side of this thing at this point. We stopped that little downward slide and now we will see if some buying comes in Wednesday. I would expect the buying to be decent."

Broker Jay Levine of enerjay LLC said that with fundamentals firmly in the bears corner, the market is going to need something significant in favor of the bulls in order to push prices much higher. "We're bound to get conflicting forecasts of upcoming weather just as surely as we're bound to get -- surprise -- cold weather," he said. "Whether or not the markets will care will partly stem from where the markets are at the time and how much they will have already discounted the cold weather since fundamentally we're in pretty fine shape. It's going to take more than just cold weather -- wide-spread cold weather should help, as has early cold."

In the near term, Levine said he sees support at $7.375, followed by $7.035, $6.750 and $6.500. As for resistance, the broker's first level is at $7.875, followed by $8.050, $8.650, $9.250 and then $10.150.

The tendency for the natural gas market to make a preseason rally has been well documented. The all-time high was reached early in the winter heating season of 2005 on Dec. 13 at $15.780. Much of that buying was the result of perceived Hurricane Katrina-derived damage to production facilities, but anticipation of a cold winter's impact on supplies is typically at the heart of rallies in seasonal commodities such as natural gas. What happens if that anticipation is not realized?

Others have noted the same phenomenon. "A market in which demand is seasonally concentrated tends to attract a substantial amount of speculative buying interest during what we call the anticipatory phase of its heavy usage cycle," said Jim Ritterbusch of Ritterbusch and Associates. He added that if the speculative buying is not supported by an unusually early cold spell, a large portion of the "specs" are often pushed to the sidelines (forced to sell) prior to the realization phase of the strong demand cycle.

More speculative longs may get pushed to the sidelines as a warming trend sets up in large Midwest energy markets. "Tuesday may wind up this area's best election day of all in terms of weather," said Tom Skilling, chief meteorologist at WGN-TV in Chicago. He added that increased sunlight "would allow temperatures to reach the 60s for the first time in eight days and could make [Tuesday] the mildest election day of at least the past six."

The warmth is not limited to Chicago. Skilling said that compressional warming as winds descend into the Plains from the Rockies are to produce 80 degree highs as far north as South Dakota.

The physical market did some pushing of its own on Monday. According to the NGI Daily Gas Price Index, cash prices at the Henry Hub Monday plummeted a whopping 89 cents to $6.72. December natural gas futures settled at $7.490.

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